All things being equal it goes without saying, the higher the percentage being offered for an ITM binary, the lower your break-even needs to be, and as the returns approach 100%, the closer we move to 50% for break-even. This is still only break-even. If you achieved this consistently your account would remain flat. Furthermore, it is not only a question of being right or wrong, but you also have to be right or wrong before expiry. I fully accept the above figures are based on some simplistic assumptions, and are far from perfect.
Nevertheless, I hope these basic principles do convey the underlying issues surrounding the maths of returns and break-even.Now some general comments concerning the timeframes of the products on offer in this market. There is everything from guessing the next up tick or down tick, to forecasting price moves over the next few seconds or the next few minutes. My own view on this type of product is as follows.At this end of the spectrum it is nothing more than betting, and like all forms of betting it can be fun.
It is not trading, and never can be. And with the odds stacked so heavily against you, you will lose your money fast. As I have said many times already, time is the game changer with options, and to succeed you need to have time on your side, and get it working for you.The Maths Of Risk & Reward:The concept of risk and reward is very straightforward. It applies to every aspect of our lives, and even more so in the financial market. It is in fact the primary driver of market sentiment.
Money is constantly moved to seek higher returns, which is then reflected in risk sentiment. Higher yields come at a higher price with more risk, lower yields carry less risk. The hot money flows into high yielding currencies are a classic example, but as soon as sentiment changes, the money flows out just as quickly. But how do we apply the idea of risk and reward in the binary options world?In the binary world, we have to consider risk and reward in two different but related ways. The starting point as always is the chart, and the binary option quote second.
I will keep stressing these points throughout the book as it is very easy to be seduced by the probabilities or odds being quoted. These are being quoted on the underlying markets coupled with time. Therefore, the chart must always be your first port of call.If you have read any of my other books on trading, and in particular the aspect of setting risk and reward targets, you will know I hold very strong views on this subject.
Many trading books, particularly those for spot forex traders, will advise you set a risk and reward target before entering a position, based on nothing more than mathematics. In other words they urge you take a position using a 1:3 or 1:4 risk to reward profile. I am sure you have come across this approach. The author suggests that if you are prepared to risk 5 pips, then you should have a target of 15 pips. My response to this is always the same.
Why should the market give you anything, let alone some arbitrary target that you decide upon in advance, simply to make the maths work for you. The market does not care about you, or what you think. The analogy I use here is of a shop. Do you open your shop every day and say ‘today I am going to make $1,000’?The short answer is no. Every day is different. It may be raining, it may be hot or cold, other shops in the area could be holding a sale.
It may be the end of the month when people have less money in their pockets, or there could be repairs being carried out in the road making access to your shop difficult. There are all sorts of reasons why your daily takings will vary. It may be a good day, an average day or a bad day. And the same is true in trading. You cannot approach the market with a predetermined risk to reward ratio, simply because it supports the maths of trading.
As I have said in my other books, the market will set these target levels for you, and it does so by defining the support and resistance levels on the price chart. This is one of the fundamental tenets of volume price analysis which is covered in the next chapter.Support and resistance (or accumulation and distribution as it is also known) is one of the building blocks of the underlying primary methodology of VPA (Volume Price Analysis).
It is a key analytical approach I use, not only for judging where a market may pause and reverse, but also in placing and managing any stop loss. In the binary options world the stop loss is redundant, so the role for support and resistance is in identifying those key areas where we believe the market may struggle in an uptrend, or find support in a downtrend.